So, who won? Keynes or Hayek?

So, more than 80 years after Friedrich
Hayek and John Maynard Keynes first crossed swords, who won the most famous
duel in the history of economics?

Although Keynesianism has been declared
dead a number of times since the mid-1970s, Milton Friedman’s acknowledgment in
1966 that “in one sense, we are all Keynesians now; in another, nobody is any
longer a Keynesian” is a more accurate, if teasingly ambiguous, assessment of
the state of economics in the early 21st century.

One key difference between the two men,
whether an economy is best understood from the top down or the bottom up,
through macroeconomics or microeconomics, left Keynes in the ascendant. His
big-picture approach is universally used today, as are such concepts as gross
domestic product, key tools by which economists measure an economy.

Friedman, in his monetarist prescriptions,
refined Keynes, but he didn’t replace him. Monetarism “has benefited much from
Keynes’s work,” he wrote in 1970. “If Keynes were alive today, he would no
doubt be at the forefront of the [monetarist] counter-revolution.” Keynes was
looking for a cure for mass unemployment. His remedy was to increase total
aggregate demand. He suggested a number of routes: through monetary means, by
lowering interest rates and funneling new money into the economy; by tax
breaks; and through public works.

Friedman convinced economists that when on
an even keel, the economy would be served better by a gradual, moderate, predictable
increase in the supply of money. It was Friedman, not Keynes, whom most
economists and politicians from the mid- 1970s on adopted as their guide, after
the application of all three of Keynes’s remedies simultaneously for three
decades resulted in stagflation. From the moment in 1979 when Paul Volcker,
then the Federal Reserve chairman, rebooted the economy by deliberately
inducing a recession, Friedman’s principles were widely applied. Friedman
adopted Keynes’s idea of running an economy through macroeconomics, and
politicians have gone along with it, whatever Hayekian rhetoric they may
sometimes employ.

Hayek took an absolutist position, that
because no one could know what was in the minds of every member of society, and
that the best indicator of their conflicting needs was market prices, all
attempts to direct an economy were misplaced. Over time, his failure to attract
support during the Keynesian hegemony appeared to drive him into arguing his
case ad absurdum. Eventually Hayek wanted state power to withdraw to a minimal
citadel, and he wished to see every last element of the economy, even the
issuance of money, in private hands because he challenged the state’s monopoly
of money-creating powers. This put him in direct opposition to Friedman, who, while
wishing for the government to be minimized, believed that an economy should be
managed to provide steady growth.

While Hayek may have risen in influence in
the last 30 years, Keynes has never been far from economists’ thoughts. The
federal government’s urgent response to the financial crisis of 2007-8,
initiated by George W. Bush and continued by Barack Obama, was thoroughly
Keynesian, with both administrations intervening in the marketplace to head off
the economy’s collapse. America faced an existential threat, and as in the
1930s, a failure to act was considered so foolhardy it was barely contemplated.

At the height of the crisis, there were few
in the short run who countered this resurgence of Keynesianism, even fewer who
with a straight face promoted the Hayekian solution, to let the market find its
own level. The view of Austrian-American political philosopher Joseph
Schumpeter that the free market must from time to time endure a period of
“creative destruction” wasn’t allowed to be put to the test. Having so markedly
been proved wrong, the widely held assumption that the free market always
righted itself over time wasn’t given a second chance. Few have tried to plot
the dire consequences that would accompany the collapse of the economy: How
many people made unemployed; how many deprived of their homes; how many
declared bankrupt; and how many businesses shuttered.

Yet Bush and Obama received little credit
for taking precipitate action to avoid an economic Armageddon. And Keynesianism
proved to be no panacea. As the stimulus failed to quickly reduce the numbers
of unemployed, and the tales of “wasted” money for contentious public programs
began to spread, many Americans became alarmed at the extent of government
borrowing. For some, such as Harvard economics professor Robert Barro, Keynes
became a figure of derision, a pied piper who lured the children of future
generations into a dark cave of intolerable indebtedness. Others accused Obama
and his economic advisers of being closet socialists. Hayek’s Austrian School
argument -- that public money put into investments would be wasted -- was
dusted off.

Like Keynes and Hayek, John Kenneth
Galbraith didn’t live to see the Great Recession, but he had an explanation for
why conservatives couldn’t applaud Keynes’s efforts to save capitalism from
itself.

“Keynes was exceedingly comfortable with
the economic system he so brilliantly explored,” observed Galbraith. “So the
broad thrust of his efforts, like that of Roosevelt, was conservative; it was
to help ensure that the system would survive. But such conservatism in the
English-speaking countries does not appeal to the truly committed conservative.
. . . Better to accept the unemployment, idled plants, and mass despair of the
Great Depression, with all the resulting damage to the reputation of the
capitalist system, than to retreat on true principle. . . . When capitalism
finally succumbs, it will be to the thunderous cheers of those who are
celebrating their final victory over people like Keynes.”